Rethinking African Financial Stability Reports

After the Asian financial crisis and the 2008 financial crisis, financial stability became the foundation on which modern market-based financial systems were designed to withstand shocks. This shaped the way central banks around the world dealt with systemic risks, with many, particularly in advanced economies such as the Bank of England and the Swedish Riksbank, beginning to publish financial stability reports. As a policy instrument, the FSR reflected the robustness of a system in dealing with systemic risks and the necessary reforms.

Fast forward to today: 70 central banks at all income levels are publishing reports detailing macroeconomic conditions, systemic risk threats, stress test results and compliance with international standards.

However, adopting an FSR suitable for developed financial systems does not apply to low-income developing countries, where the context could not be more different. These countries, with small and shallow financial markets and highly adverse macroeconomic and balance of payments conditions, are particularly vulnerable to disruptions and drying up of financing, reinforcing endogenous structural weaknesses. Relying on market mechanisms and private sector actors to adapt to such disruptions or respond to a country’s development financing needs is a major challenge.

The state of financial systems and their level of risk vary significantly depending on income (Figure 1). Some countries are at increased risk of sovereign debt and banking crises, and most countries with strong sovereign-bank nexus – a phenomenon prevalent in all LIDCs – tend to be less willing to manage financial stress and make timely policy interventions.

Figure 1. Preparedness and risk

Financial sector risk outlook over the next 12 months by income group (% of countries in sample)

Source: World Bank, Finance and Prosperity Report 2024

Note: Panel A: Assessment of domestic financial sector risks over the next 12 months as determined by World Bank regional staff. The sample includes 50 EMDEs. For specific country details, see Appendix B of the report.

There are arguments for rethinking financial stability

The Covid-19 pandemic and the resulting crises – rising debt, climate change and development deficits – have pushed LIDC financial systems to their limits. Over 50 conflicts worldwide, many in Africa, have further weakened financial systems by undermining public trust, disrupting financial flows, diverting money into non-formal channels and uses, and exacerbating financial distress.

OMFIF’s Absa Africa Financial Markets Index 2023 provides a detailed assessment of financial market vulnerabilities highlighted in the FSRs. It highlights the significant differences in the development of financial markets across the continent. In 2023, South Africa and Mauritius topped the index in market transparency, liquidity and regulatory frameworks with scores above 70. These countries benefit from well-developed financial systems that attract foreign investment. However, countries such as Ghana, Nigeria and Kenya are lagging behind as they struggle with limited capital market depth and a weak regulatory environment.

Global economic disruptions, including supply chain shocks and exchange rate volatility, have exacerbated these local vulnerabilities. These pressures prevent LIDC financial systems from enabling much-needed investment growth and development financing.

Areas for improvement

Unfortunately, as a policy tool, many African FSRs mirror templates used in advanced economies and focus on traditional risks – liquidity, credit and market risks – without considering the role of finance in long-term growth. These LIDCs require a tailored approach to financial stability policy that is tailored to the circumstances and capacities of the local market and goes beyond systemic risk and prudential management to also include promoting long-term and sustainable economic growth. Several key areas are underrepresented in African FSRs, limiting their effectiveness in assessing the trade-offs between development finance and finance as a vehicle for asset management, unhealthy arbitrage and speculative investments.

For LIDCs, FSRs must sharply and analytically reflect local economic realities and the critical role of finance in growth and development. Recent African FSRs highlight risks such as inflation, fiscal dominance and sovereign debt challenges. However, they are unable to provide a clear representation of how traditional measures of financial soundness and stability affect development and growth.

Three measures could help address this shortcoming and provide a more country-specific framework for monitoring the role of finance in a country’s development.

First, to improve the effectiveness of FSRs, the construct of financial stability should be expanded beyond the management of risks to also include facilitating investments in development infrastructure that supports economic growth and climate resilience. This realignment would transform FSRs into strategic tools that guide policy and ensure that financial intermediation and risk-taking promote broad societal benefits rather than exacerbating existing income disparities. By expanding their scope, FSRs could play a critical role in aligning financial stability with sustainable development goals, particularly in emerging and low-income economies.

Second, African FSRs must prioritize financial inclusion. Large segments of the population in LIDCs remain disconnected from formal financial systems, exacerbating economic fragility. Without access to credit, savings and other financial services, marginalized groups – such as micro-enterprises and rural communities – are excluded, weakening the overall economy. Expanded access to finance would not only strengthen economic resilience but also create a stronger middle class, which in turn increases financial stability. To better illustrate this impact, FSRs should go beyond descriptive statistics on financial inclusion and include impact indicators that capture the transformative role of finance in these communities.

Third, partnerships and collaboration are critical to building financial resilience. Although African economies are deeply interconnected, their financial systems remain fragmented. Most FSRs focus narrowly on domestic risks and often overlook the potential of regional or continental arrangements – including data sharing, statistics and digitalization – to strengthen the role of finance as a growth engine. Incorporating regional risk assessments into African FSRs could not only help address external shocks, but also enable coordinated cross-border responses, boost investor confidence and attract long-term investments to the region.

As Jay Shambaugh, Under Secretary of the Treasury for International Affairs, noted earlier this year, addressing the challenges of debt and development is a “generational challenge” that requires decisive local and global action.

LIDCs can meet their financing needs by strengthening the FSR as a policy tool. The next generation of African FSRs should evolve from narrow systemic and regulatory risk management tools to strategic fiscal policy tools that prioritize sustainable, long-term economic progress. More robust, realistic and forward-looking FSRs will be a blueprint for addressing Africa’s complexities, meeting its financing needs, reassuring investors and financiers and ensuring a prosperous future for its economies.

Udaibir Das is a former Deputy Director and Advisor to the Monetary and Capital Markets Department of the International Monetary Fund. He is a Non-Resident Fellow at the National Council of Applied Economic Research and a Senior Non-Resident Adviser at the Bank of England.

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